Eben Macdonald assesses the relationship between environmental sustainability and economic growth, exploring the different challenges and opportunities for developed and developing nations.
The Environmental Kuznets Curve is often invoked to favour the notion that economic development has an incrementally beneficial impact on a country’s environmental sustainability, meaning that once most developing countries surpass a certain income threshold, environmental amelioration will come as an inevitable externality of continued growth. However, its proponents frequently neglect a multitude of factors which mediate the relationship between growth and sustainability – the most crucial one, I shall maintain in this essay, is institutional quality. This is defined as a government’s commitment to upholding property rights and protecting the market economy from corrupt and arbitrary interference at the hands of both public and private agents. In countries where institutional quality is higher, a given unit of economic growth will produce a greater improvement in sustainability than in places with lower institutional quality, expressed mathematically below:
Where ES represents environmental sustainability, Y represents GDP, and k the degree of institutional quality. There is already strong empirical confirmation of this – a study by Christian Bjørnskov indicated that higher economic freedom is dramatically effective at drawing back the maximal point of the EKC in the case of CO2 emissions (Bjørnskov, 2020). What this suggests is that developing and developed countries alike must not passively rely on economic growth to improve environmental standards, but instead must commit to robust institutional reforms which make the process of development allocate resources in more environmentally sensitive ways. With this said, the onus for reform does fall on developing countries more, as they are more institutionally deficient. According to the Fraser Institute’s measurements, developing countries overwhelmingly lack a pro-market orientation in terms of property rights, regulation, and openness to trade (Fraser Institute, 2016).
In the following part of this essay, I will explore the specific channels through which economic growth can improve environmental sustainability, as articulated by proponents of the EKC, and explain how institutional quality improves its effectiveness through those channels. Here I will explore three of them: (1) higher economic growth produces more human capital, which results in more environmentally positive innovations (2) higher growth provides firms more capital to invest in technology (3) higher growth – and thus reduced material subsistence for much of the population – increases peoples’ interest in solving environmental problems, motivating government policy action.
The link between economic growth and technological innovation is well-known. Although human capital itself generates growth, growth provides governments the revenue to further invest in education and perpetuate the cycle. The existence of more human capital – highly skilled scientists, technicians, and entrepreneurs – creates more technology which plays a crucial role in reducing humanity’s impact on the planet. But institutional quality itself also determines the utility of human capital at producing technological revolutions, which characterise growth’s effectiveness at helping the environment.
The best example to illustrate this is nuclear energy, by far the technology with the most potential to combat climate change, operating at full capacity 92% of the time, and capable of releasing more energy than large quantities of coal, oil, and gas combined (Sen, 2019). With this, one would expect widespread public and entrepreneurial interest in nuclear power plant construction, to bring down energy costs and radically improve humanity’s environmental footprint. However, this hasn’t been the case – from 2009 to 2019, the costs of virtually every renewable energy source plummeted – including an astonishing 90% for solar energy – except for nuclear energy, which in fact rose (Roser, 2020). The only plausible explanation for this has been the growth of regulation faced by the nuclear energy industry. For both coal and natural gas, investment constitutes 50% and 25% of plant construction costs, respectively, while its over 75% for nuclear energy. Two major components of investment costs include material and labour expenditure, which have risen aggressively, directly a result of explosively growing regulation; from 1970 to 1976 alone, the number of regulatory guides issued by the US government to the nuclear energy industry rose from 50 to 200. These increased material outlays, as state edicts stipulated plants install various expensive material components, such as pipe restraints to absorb against seismic shocks, new barriers to mitigate against fire safety hazards, and new complex power systems to monitor plant safety. Experts note that "over the course of the 1970s, these changes approximately doubled the amounts of materials, equipment, and labor and tripled the design engineering effort required per unit of nuclear capacity" according to the Atomic Industrial Forum.
All in all, regulation alone drove up nuclear energy costs by 176% from the 1960s to the mid 70s, according to a study from 1980, massively hindering plant construction (Spiewak and Cope, 1980). If regulations on nuclear energy were significantly relaxed, economic growth would become a far more efficient tool at improving sustainability – especially within developed countries, which already have a human capital advantage for developing nuclear plants – as income could be easily invested into a tremendous renewable substitute for our current energy infrastructure.
Putting the costs of energy substitutes aside, higher growth provides more capital for firms willing to invest in such technology. Once again, institutions become of relevance here. If state-run enterprises (SOEs) dominate a high-growth economy, then fewer opportunities will be taken to invest in efficient, sustainable technologies, whereas if industries are broadly left in private hands, then the inherent price sensitivity of the free market is permitted to operate, making the process of economic growth far more potent at driving improvements in cheapening, efficient and ultimately cost-saving technologies. This is particularly relevant to developing countries, where public ownership of infrastructural amenities, such as power grids, continues to be popular. In South Africa, for instance, the state-owned Eskom controls 95% of the nation’s power grid. Aside from laughably inefficient bureaucratic management, the company’s environmental record is also poor, given its costly and outdated transportation techniques of using locomotives, as well as the fact the country continues to be hugely coal dependent (The Economist, nd). In high contrast, the privatisation of energy firms in other emerging markets has proven to be an environmental success story – a study even found that privatisation in Eastern Europe led to a 55% reduction in sulphur dioxide emitted by individual firms (Meyer and Pac, 2013). The elasticity of investment in sustainable technology in respect to economic growth is mediated, crucially, by the agents who dominate the economy. If they’re private sector-based, then they have the economic sensibilities to make those investments in revolutionary technologies, unlike state actors, who are much less conscious of the price signals and profit incentives which guide investment.
Proponents of EKC finally posit that economic growth enhances sustainability because poverty alleviation makes the population more interested in solving environmental problems, putting pressure on governments. This begs questions, though, about the effectiveness of those policies. In both developed and developing countries, this depends on a country’s institutional framework. Where institutions are sound, policymaking may have tangible economic payoffs, while in places with institutional deficiencies, economic agents may lack the resources to co-ordinate the meaningful implementation of government policy initiatives. A perfect illustration of this is the case of property rights in the Amazon Rainforest. Attempts to police illegal mining and the violent expropriation of land in the Amazon have proven largely unsuccessful, due to the widespread absence of property rights. According to the World Bank, a whole 29% of the Amazon is ‘undesignated’, meaning it lacks any claim to private ownership. A consequence of such is sustained environmental degradation, as it becomes “tougher to enforce environmental laws, since it is often unclear who is responsible for a given slice of forest” (The Economist, nd). If Brazil – and developing countries generally –chose to enforce property rights more, then pressures on governments to protect the environment, contingent on economic growth as EKC theorists predict, may be genuinely effectual. The protection of the Amazon, a globally important environmental good, would serve as an unmatched weapon in the fight for worldwide sustainability.
Essay by Eben Macdonald
References
Bjørnskov, C. (2020). Economic Freedom and the CO2 Kuznets Curve. SSRN Electronic Journal. doi: https://doi.org/10.2139/ssrn.3508271.
Fraser Institute. (2016). Economic Freedom of the World. [online] Available at: https://www.fraserinstitute.org/economic-freedom/map?geozone=world&page=map&year=2021.
Sen, D. (2019). Nuclear Energy Vs. Fossil Fuel. [online] Sciencing. Available at: https://sciencing.com/about-6134607-nuclear-energy-vs--fossil-fuel.html.
Roser, M. (2020). Why did renewables become so cheap so fast? [online] Our World in Data. Available at: https://ourworldindata.org/cheap-renewables-growth.
Institute for Progress. (n.d.). Why Does Nuclear Power Plant Construction Cost So Much? [online] Available at: https://ifp.org/nuclear-power-plant-construction-costs/#:~:text=.
Spiewak, I. and Cope, D. (1980). Overview Paper on Nuclear Power. Oak Ridge, Tennessee: Oak Ridge National Laboratory.
The Economist. (n.d.). The man with a plan to fix Eskom. [online] Available at: https://www.economist.com/business/2022/07/14/the-man-with-a-plan-to-fix-eskom [Accessed 21 Dec. 2023].
Meyer, A. and Pac, G. (2013). Environmental performance of state-owned and privatized eastern European energy utilities. Energy Economics, 36, pp.205–214. doi: https://doi.org/10.1016/j.eneco.2012.08.019.
The Economist. (n.d.). To save the Amazon, Lula must work out who owns it. [online] Available at: https://www.economist.com/the-americas/2023/11/28/to-save-the-amazon-lula-must-work-out-who-owns-it [Accessed 8 Dec. 2023].
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